Capital growth isn’t always a sure thing. Here are some common myths.
Whether you’re a home owner or investor, one of the big attractions of property is its potential for capital growth. Who hasn’t looked at properties that have gone up substantially in value and wanted to share in the bonanza?
If you’re thinking about investing, you may also be weighing up rental return versus capital growth.
But be warned: capital growth isn’t the automatic reward that many people assume it is. Here are just a few of the myths floating around.
1. Growing population means capital growth
The head of research with CoreLogic, Tim Lawless, says focusing on the demand likely to come from a growing population completely ignores the supply side of the equation.
“Strong demand in the face of high supply isn’t a good investment decision,” he says. “If you’re looking at population growth, you also have to target areas where there are inherent constraints on supply.”
Propertyology managing director Simon Pressley recently researched the link between population growth and capital growth and found a much more complex picture. Along with supply, he says factors such as affordability, jobs growth and sentiment also determine how much growth you’ll get.
“You can have high population growth, but if the people who are coming to live there can’t afford to buy, or if developers are building more housing than is required, you’ll get fairly average performance,” Pressley says.
2. The inner city is the best place to invest
“This is another gross generalisation that’s used a lot,” Pressley says. “Again, it’s about supply as well as demand. Some inner suburbs of Sydney, Melbourne and Brisbane are getting smashed by apartment building at the moment.”
Lawless says that in the September quarter of 2015, 26 per cent of units resold in Melbourne’s inner city were sold at a loss. Again, he says investors should be looking for constraints on supply such as detached houses (it is land that is scarce), or areas with high levels of heritage housing or sites where housing density cannot be increased easily.
It can also pay to do a little research into suburbs that are showing strong growth.
3. Your money should double every 10 years
Lawless says this is often cited as a good “rule of thumb”, but over the past 10 years, only one major city – Melbourne – achieved a doubling of average house prices. The odds of doubling your money improve substantially if you get your timing right and buy at the bottom of the market and sell at the top. But very few investors do this.
“People are impatient and have unrealistic expectations,” says Pressley. “Too many look for the latest hot spot but you need to be patient and look to the medium term. The best markets for the next 10 years are probably flat now.”
Is your property achieving strong capital growth? What are the influencing factors? Tell us in the comments below.